Gov't delays personal income tax reforms
The government is postponing the reform of personal income tax until next year. Despite last year's vows by the former coalition of the Solidarity Election Action (AWS) and the Freedom Union (UW), taxpayers will have to wait until next year for a new debate on personal tax cuts and the promised pro-family tax policies.
Meanwhile, the government has supported the majority of the tax law amendments prepared by the parliamentary public finance committee, which had their first reading at the Sejm last Friday. The government didn't, however, support the committee's proposal to lower the top two personal income tax rates next year.
"Due to the budgetary situation in 2001, the government is postponing tax rate cuts, " said Jan Rudowski, the deputy finance minister. "At the beginning of the new year, the government will introduce proposals on tax rate cuts, pro-family tax policies, the further removal of tax breaks and the possibilities of taxing income from financial instruments." According to Rudowski, the government is against taxing incomes from financial instruments until the end of 2003.
The parliamentary committee proposed that in 2001, the 30% and 40% personal income tax rates should be cut to 29% and 36% respectively. The lowest rate, 19%, would remain unchanged for the next two years. In 2002, the two rates would be lowered again to 28% and 35%. In 2003, the three-tiered personal tax system would be replaced by two rates of 18% and 28%. The committee also proposed to eliminate tax breaks on private healthcare and investment spending (the change would not refer to investments made from 1997-2000), as well as on house rental projects, pensions, and alimony.
According to Aleksandra Gieros, who spoke on behalf of the finance minister, there is no chance this year for the most controversial proposals to go through. "We have only a month and a half to pass the bill through the Sejm and have it signed by the president," she said. "So, the government supports those changes that haven't been controversial within the committee and thus have a chance of being passed by the Sejm and not being vetoed by the president."
Last year, President Aleksander Kwasniewski vetoed the bill on rate cuts in personal income taxes proposed by the Sejm and the Senate. Although corporate tax cuts survived, the veto drastically weakened and delayed the planned reform of the Polish tax system. The tax reform, which has already suffered from two years of wrangling within the government and fierce opposition from the Democratic Left Alliance (SLD), was first drafted in 1998 in the White Book of Taxes presented by former Finance Minister Leszek Balcerowicz.
The reform's goal was to remove tax breaks and align corporate and personal income taxes. The White Book called for a drastic reduction in personal income tax to a flat rate of 22% in 1999 and step-by-step reductions of the corporate tax rate to 22% by 2002.
The White Book's original plan was changed and adopted in a compromised form, passed by the Sejm and sent to the president last year. The proposal, vetoed by the president, called for the reduction of the two top personal income tax rates of 40% and 30% to 36% and 29%. The lowest rate, 19%, was to remain unchanged in 2000. Under the Sejm's proposal, in 2002, the three-tiered system was to be reduced to two tiers of 18% and 28%.
While Kwasniewski vetoed the bill on personal tax rates, he signed the corporate tax bill. Under the bill, the corporate tax rate is to be gradually lowered to 22% by 2004. Due to the presidential veto, the alignment between personal and corporate tax rates, one of the goals of the White Book, has become even more urgent.
But the SLD opposition is unlikely to support bold cuts in personal tax rates for next year. "Such decisions should be taken by the next Parliament and the next government," said Stanisaw Stec, the SLD's deputy member of the public finance parliamentary committee. "We are in favor of lowering tax rates, but for the poorest and not for the richest."
Meanwhile, current discrepancies between the corporate tax system and the personal tax system might be one of the reasons why the left-wing opposition will be ready to support at least some changes presented in the bill prepared by the parliamentary committee.
"We need to focus on changes, which are a must considering the current differences between the two tax systems (corporate versus personal)," Stec said. "Take the tax breaks. Individuals who run a business and pay taxes under the personal income system still have an investment tax break and under the corporate system there is none."
According to Stec, the SLD parliamentary club favors abolishing the investment breaks, which in the case of corporate taxpayers, were done away with this year. "We are also in favor of eliminating the tax break assigned to constructing houses for rent, but we probably won't support the abolition of tax breaks on private healthcare."
According to Finance Ministry estimates released last week, eliminating some tax breaks and postponing tax cuts would increase next year's revenue from personal income taxes by zl. 200 million ($46.5 million). This year, according to Finance Ministry estimates, 46.97% of taxpayers, or more than 10 million people, benefited from tax breaks, which cost the treasury more than zl. 4.1 billion ($953 million).
